Recently, the Reserve Bank of India (RBI) bought treasury bills from the secondary market. This is no speculation. The weekly statistical supplement (WSS), which the central bank puts up on its website every Friday, says that.
There is speculation in the market on whether the RBI has started buying treasury bills from the primary market too. We don’t know for sure. The Clearing Corporation of India Ltd, the platform for settling such deals, does not identify the central bank as a buyer. Of course, the RBI could come under the category of “others” which includes primary dealers, insurance firms, provident funds, et al. We will get to know from the WSS, with a LAG effect.
Meanwhile, the government has revised its plan for raising money through short-term treasury bills in the first quarter (April-June) of the current financial year. From this week till June, it will raise Rs2 trillion more through treasury bills than what it had planned earlier.
A Friday news report of Cogencis, a real-time market data and financial news provider, says the RBI may have taken a step closer to directly monetising the Centre’s borrowing by resorting to indirect subscriptions of government bonds at auctions. The demand for last Friday’s bond sale was higher than what we were seeing in recent times.
Quoting an unnamed senior government official, the news agency said last Friday and even earlier that the RBI had let select market participants become its proxy in purchasing dated securities and treasury bills. The perception is, primary dealers are buying the government papers in the auctions and the RBI is buying the papers from them.
Such buying can happen for the RBI’s own balance sheet management. When some dated securities in its balance sheets are due to mature, the debt management and financial market operations teams in the central bank often replace them by buying new securities. Such buying is also done to maintain the maturity profile of the bonds in the RBI’s books.
There is ample liquidity in the system and the RBI does not need to be present in the market to see through the government’s borrowing programme but its buying can help bring down the bond yield. The recent rate cuts have not transmitted into the longer end of the bond market even though the yields at the shorter ends have come down a bit.
Almost two decades ago, in 2001, the RBI had bought bonds through the primary dealers — involved in the buying and selling of government securities — after a series of terrorist attacks in the United States on September 11 shocked the global markets, leading to chaos.
Typically, the RBI buys bonds from the banks through the so-called open market operations to stem the volatility in bond yields but it can even buy bonds directly from the government, through the private placement route in exceptional circumstances. Section 5 of the Fiscal Responsibility and Budget Management (FRBM) Act allows the RBI to do so.
The Section 4 (2) of the Act says it can be done “on grounds of national security, act of war, national calamity, collapse of agriculture severely affecting farm output and incomes, structural reforms in the economy with unanticipated fiscal implications, decline in real output growth of a quarter by at least 3 percentage points below its average of the previous quarters”.
Of course, such buying is not unlimited as the Section 4(3) of the Act caps the deviation from the fiscal deficit target at 0.5 per cent of GDP.
In its aggression and determination to fight Covid-19, the RBI is not far behind other global central banks. It is doing almost everything that others are doing to keep the economy chugging along and to maintain financial sector stability although the playing fields are very different.
For instance, the monetary measures in India are not supplemented by the fiscal measures the way most Covid-19 affected developed markets have been doing.
An April report of the International Monetary Fund has a table explaining the impact of fiscal stimulus on the fiscal deficit of different countries. For the entire world, it is 6.2 per cent of GDP. For the advanced economies, it is 7.7 per cent (led by the US at 9.6 per cent, Euro Area 6.8 per cent, United Kingdom 6.1 per cent; and Japan 4.3 per cent) and, for emerging markets and middle income economies, 4.3 per cent (led by China at 4.8 per cent).
Also, the likes of the US Federal Reserve, the Bank of England and the Bank of Japan have been doing things on their own — such as buying bonds and extending liquidity support directly — while the RBI has preferred to do these through the banking system.
The objective of the latest rate cut by the RBI is to push banks to lend.
The real interest rate in India, by any yardstick, has already become negative. The retail inflation in March was 5.9 per cent. The RBI estimates a declining trajectory for inflation in the coming months but the reverse repo rate, which has become the de facto policy rate in India, is 3.75 per cent, the repo rate is 4.4 per cent and the one-year treasury bill yield is 4.25 per cent.
Even if the RBI goes for another round of rate cut — which it will — will the banks lend? How do we strip them off their risk-averseness?
One way of doing this could be offering credit guarantee to the banks, say 10 per cent, for fresh loans given to micro, small and medium (MSME) enterprises. The government has done a similar thing to encourage banks to lend to the stressed non-banking financial companies. It can do that for the MSME segment, affected the most by Covid-19 and most critical for bringing the economy back on the growth path.
The US Federal Reserve is buying even junk bonds through a special purpose vehicle in which the government holds 10 per cent stake. The RBI does not need to go that far. But credit guarantee by the government to the banks might do the trick — the fiscal cost for which is very small.